MD Business Partners Limited
The original article can be found here.
There are so many factors to consider before launching a business – a sound business model, the market, location or workspace and other overheads, bank accounts and licensing, to name a few. However, strategic pricing should always be at the top of your priority list to ensure the viability of your business.
The pricing of goods and services is so crucial that it has produced a whole industry of pricing analysis specialists. These experts build pricing models based on market trends, statistical analysis and strategic positioning. Finding the right price point to enter the market competitively is no small feat – it’s more of a science.
Getting it right is essential, because pricing; whether directly or indirectly, will influence all aspects of your business, from profit margins and sales volumes to market share. Below are three basic principles that small and medium-sized enterprise (SME) owners need to consider before loading the labels into the pricing gun:
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Don’t build your competitiveness on pricing alone
One of the biggest mistakes that small business owners make with regard to pricing, is believing that the lowest price is the most competitive price. This oversimplification is a common mistake among business owners who base their entire business strategy on it. Regardless of how niche your product or service is, large corporate competitors will have the budget and market influence to undercut your pricing.
Therefore, relying on pricing alone as a competitive benchmark is very risky. In addition, setting your price too low can create the impression that your business is offering an inferior product to that of your competitors, and may result in consumers undervaluing your product or service. Finding the balance between charging what your product or service is worth, and charging a price that is relative to your competitors, is not easy, but it’s an exercise that’s worthy of a significant investment of time and resources to ensure you are able to build a sustainable business.
Understand the true cost of your product
Minimising costs is often a key focus for business owners, who often “wear multiple hats” or bootstrap their way through aspects like accounting, marketing and recruitment, in order to do so. What entrepreneurs need to bear in mind is that time and effort also come at a cost. Every hour spent working on developing a business equates to an opportunity cost, or time that could have been spent elsewhere to generate revenue.
As such, all costs need to be factored in when determining the price of goods and services in order to avoid running at a loss. There are a few hidden costs to consider, including equipment depreciation, water and electricity, mileage and licensing fees. These costs add up over time and their sum total and impact can be deceptive. It’s important to weigh up the total cost of running a business in terms of time, labour and output cost – rather than just the monetary cost. This will allow you to determine your profit margin more accurately.
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Optimise the law of supply and demand
The capitalist system in which we live is governed primarily by the law of supply and demand. This law is an economic theory that demonstrates the relationships between these concepts. Supply and demand has a profound effect on pricing – the price of your goods or services should always reflect the market conditions in order to remain competitive.
When supply is high and exceeds the demand for a good or service, the price usually drops, while on the converse, prices will rise when demand exceeds supply.
Understanding this synergetic relationship is key to ensuring your pricing model will deliver margin even in a depressed market, although tighter. Time spent on market research to determine the need for your product or service in order to build a viable and sustainable business, is never wasted.
Ben Bierman is a managing director at Business Partners Limited
